Ink LLP
Counsel to those shaping the next decade
bg_solid.png

Articles

Getting to the Point

We post articles that get to the point. Covering topics in law, business, technology, innovation and startups. Each article is based on questions we receive from entrepreneurs, investors and high-growth companies we work with.

Follow Ink LLP on LinkedIn for notification of new posts!

 
 

Tax Leverage Hides in the Details

 

In Canadian private deals, structure often matters more than valuation. Tax treatment can cause a significant swing in the net proceeds a seller takes home, and can be leveraged by buyers to structure more affordable purchases.

Core Insights

  • The share sale advantage. Individual Canadian sellers are strongly motivated to sell shares (vs. assets) because of the lifetime capital gains exemption (currently, around $1.25 million per person). That incentive drives behaviour. Savvy buyers use it to win on terms without giving up price.

  • Avoid sales tax drag.  Asset deals in Canada normally trigger GST or HST: up to 15% depending on the province. That cost may be avoided through certain tax elections. Often, it’s simple paperwork, but it must be built into the transaction early.

  • Reverse earn-outs. Generally, Canada taxes standard earn-outs as income. However, a “reverse” earn-out (where the price adjusts downward post-closing, instead of up) can convert it to a capital gain. It’s a small structural change with big tax impact.

  • Structure before price. Too many foreign buyers focus on headline valuation first and structure second. In Canada, the order should be reversed. Tax determines how much value survives closing, and how much actually hits a seller’s pocket.

Takeaway

Canadian tax mechanics shape deals. If you structure early with this in mind, you win twice: once in certainty and again in economics.

Ink LLP is a business law firm with focused expertise in venture capital, mergers & acquisitions, and complex commercial transactions.

This information is provided for informational purposes only, is highly generalized, and is not legal advice.

Connect with Counsel
 
M&AGeoff Dittrich